bankruptcy brain,” is also a must,” Natsis says. “Then you need a
litigation brain, because people are going to be suing each other.”
Just Don’t Call it a Boom
N atsis would rather not use a word like “boom” to refer to the an-
t icipated explosion in real estate legal work. “I wouldn’t call it that,”
h e says, adding that he prefers to avoid putting any unintended
p ositive spin on attorneys having to assist clients who may be in
s erious financial trouble.
“The boom was when people put all CMBS debt on properties
t hat were bought and sold several times in five-year period,” he
a dds. “This is sort of a lesser version of the boom in solving all of
t hese problems.”
But it’s hard to argue that things in certain areas of real estate law
p ractices—in the litigation arena, rather than on the transactional
s ide—aren’t about to pick up pretty soon around the country. “It
d efinitely is an uptick in the cycles,” he says, noting that this upturn
“ could make 2009 busier than 2007 and 2008.”
Despite the negativity associated with a likely boom in legal action, there are some folks who are looking forward to an uptick—
the opportunists.
“Opportunity funds and REITS have a lot of cash just sitting
there,” Natsis says. “The people who will play this game, especially
the people who will end up with the properties, are well heeled.
I have guys who are waiting on the sidelines with huge freaking
wheelbarrows of money. There’s more money waiting now to be
invested than was invested in any particular year in the upcycle.
It’s accumulated.”
If Natsis had to estimate, he says, “I would say billions and billions of dollars. Some of the pension funds are committing larger
allocations to real estate.” Besides, he adds, “Whatever you have
in 2009 in real estate, you know it’s going to be worth a whole lot
more in 2015.”
Lew Feldman, partner and Los Angeles office chair of Goodwin
Procter LLP, is seeing a swell of legal work forming in anticipation
of acquisition opportunities for distressed municipal bonds, which,
he notes, have the rights of first lien, even above banks.
“They’re looking to play the distressed asset game from that position,” Feldman adds. “There are a huge number of opportunity
fund dollars that are on the sidelines.”
Aside from distressed opportunities, there is already a ground-swell of work forming for attorneys to assist clients in dealing with
the intricacies of the federal government assistance programs.
“If you accept TARP money, the maximum amount that an executive can be paid is $500,000,” says Feldman. He notes the legal
work from compensation arrangements alone will be tremendous,
since it will deal with “how executive compensation will work beyond the $500,000 once the TARP funds are paid off.”
The bankruptcy issues alone will be complex. Feldman points
to the LandSource collapse as a small taste of all the legal work
generated in the area of bankruptcy alone. And he believes there
will be many more cases mirroring the issues in the LandSource
case, where the bankruptcy was not a result of failure to make payments, but due to the covenants with loan documents that require
real property assets to be marketed annually.
“The whole capital market, all of this product around the globe,
is frozen in its ability to be able to quickly deal with remedies,” Feld-
man says. “So what happens is that you end up with a bankruptcy
to bring everybody in.”
A plethora of dispute matters are sure to rear up in the next few
years, from liens being placed on properties due to failed construction payments, and contractors who aren’t paid off as a result of
a bankruptcy. Feldman also expects a spate of surety bond litigation due to the failure of cash-strapped builders to make good on
contractual obligations to build that road or make those promised
infrastructure improvements. That sets up legal wrangling between
insurance companies obliged to pay local governments and cities
with depleted budgets faced with more unwanted woes. “That’s a
whole treasure trove of legal work,” Feldman notes.
Madoff Knockoffs, and Other News
And for a bit more bad news, Dennis Ellman, real estate practice
group leader at Greenberg Glusker in Los Angeles, believes we will
see more Bernie Madoff-type scandals unfold.
“We believe that with the fall of the securities market, a lot of
these scams will come to light,” he says.
He reasons that when the market was good, there was plenty of
money being taken in to pay investors who wanted to exit “murky”
investment opportunities. But as these “schemes” get strapped for
cash, and worried investors start asking about their money, ensuing
dominoes may fall, Ellman predicts.
“With Madoff, we may be seeing kind of the tip of the iceberg,”
he states.
In fact, Greenberg Glusker has formed an interdisciplinary
group, the investment fraud group, to help clients who have suffered investment losses from some kind of a fraud.
“We have formed an interdisciplinary team of bankruptcy lawyers, real estate transactional lawyers, and land use lawyers and litigators to help deal with those suits,” he says.
Aside from dealing with fraud, Ellman also thinks the slew of
litigation set to be unleashed on the legal world is about “what
you would expect.” He adds that the term “loan workouts” may
become one of the most constantly used phrases in 2009 and the
next few years.
“People will be trying to restructure securitized loans, and
mezzanine debt, or paying forbearance to lenders while trying
to stabilize the property, you’ll see work in landlord tenant
defaults,” he says. “A client some months ago called me and
they had a 250,000-square-foot warehouse distribution facility
in the Inland Empire and they are in the home furnishing
business—obviously that business has been significantly impacted. They want us to negotiate with their landlord to reduce the usage of 250,000 square feet down to 100,000 square
feet, which frankly is all they need and all they can afford at
this time in terms of rent.”
He adds, “We think there’s going to be a lot of repositioning of
properties.”
In retail, there will be repositioning, especially with the number
of shopping centers where one of the failing retailers, like Circuit
City, was the anchor.
“You’re going to need to find another tenant,” he says. “In the
universe of big box users, you may have to give up right now on
that type of tenant and have to figure out what else to put there—
theaters, a restaurant, or even a totally different use.”
